Dover Corporation's (DOV) CEO Bob Livingston on Q3 2016 Results - Earnings Call Transcript

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Dover Corporation (NYSE:DOV)

Q3 2016 Earnings Conference Call

October 19, 2016 10:00 am ET

Executives

Paul Goldberg - Vice President, Investor Relations

Bob Livingston - President and Chief Executive Officer

Brad Cerepak - Senior Vice President and Chief Financial Officer

Analysts

Scott Davis - Barclays Capital

Steve Winoker - Sanford C. Bernstein

Joe Ritchie - Goldman Sachs

Andrew Kaplowitz – Citigroup

Andrew Obin - Bank of America Merrill Lynch

Steve Tusa - J.P. Morgan

Jeffrey Sprague - Vertical Research Partners

Nigel Coe - Morgan Stanley

Deane Dray - RBC

Julian Mitchell - Credit Suisse

Operator

Good morning, and welcome to the Third Quarter 2016 Dover Earnings Conference Call. With us today are Bob Livingston, President and Chief Executive Officer; Brad Cerepak, Senior Vice President and CFO; and Paul Goldberg, Vice President of Investor Relations. After the speakers’ opening remarks, there will be a question-and-answer period. [Operator Instructions]

As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you.

I would now like to turn the call over to Mr. Paul Goldberg. Mr. Goldberg, please go ahead sir.

Paul Goldberg

Thank you, Paula. Good morning and welcome to Dover’s third quarter earnings call. With me today are Bob Livingston and Brad Cerepak.

Today’s call will begin with comments from Bob and Brad on Dover’s third quarter operating and financial performance, and follow with an outlook for the remainder of 2016. We will then open up the call to questions. As a courtesy, we kindly ask that you limit yourself to one question with a follow-up.

Please note that our current earnings release, Form 10-Q, investor supplement and associated presentation can be found on our website, dovercorporation.com. This call will be available for playback through November 2, and the audio portion of this call will be archived on our website for three months. The replay telephone number is 800-585-8367. When accessing the playback, you’ll need to supply the following access code, 88535285.

Before we get started, I’d like to remind everyone that our comments today, which are intended to supplement your understanding of Dover, may contain certain forward-looking statements that are inherently subject to uncertainties. We caution everyone to be guided in their analysis of Dover by referring to our Forms 10-K and 10-Q for a list of factors that could cause our results to differ from those anticipated in any such forward-looking statement.

Also, we undertake no obligation to publicly update or revise any forward-looking statements, except as required by law. We would also direct your attention to our website where considerably more information can be found.

And with that, I’d like to turn the call over to Bob.

Bob Livingston

Thanks, Paul. Good morning, everyone, and thank you for joining us for this morning’s conference call. Our third quarter results were disappointing. As the continuing weak macro environment further declines in longer cycle oil and gas applications and production inefficiencies and our retail refrigeration business impacted both volume and earnings. These results were well below our expectations, and more than offset solid improvements in our upstream drilling and production businesses, as well as continued strong performance in our Printing & Identification platform.

From a geographic perspective our US and China activity declined organically, both sequentially and year-over-year. On an organic basis our European markets improved sequentially and year-over-year. Within Energy, revenue was up 5% sequentially largely within our drilling and production markets, this improvement was driven by increases in the North American rig count principally in the Permian.

The recent trends in rig count and oil price are constructive and supportive of continued near term improvement in our early cycle businesses. That said, within this segment we continue to be challenged in longer cycle applications. Engineered systems organic growth of 1% was driven by another strong quarter in Printing and Identification which posted organic growth of 5%. And the Industrial Platform organic revenue declined 2%, though our vehicle service equipment business had a very strong quarter.

Fluids posted 17% revenue growth driven by acquisitions. However our organic revenue declined of 9% reflects activity reductions in our businesses with longer cycle oil and gas exposure as well as tough comps. Lastly, growth in retail fueling was less than anticipated while our businesses serving to hygienic and pharma markets continue to show very strong growth.

Refrigeration and food equipment revenue declined 2% organically principally driven by tough comps and can-shaping equipment. Margin performance was well below expectations at Hillphoenix primarily driven by production challenges in case manufacturing. We continue to implement changes to improve the business.

Regarding acquisitions we have closed two deals since our last earning call both in Engineered Systems. We added a small Automation and Data Analytics business and also acquired a European Lift business. The addition of the lift business gives us a $500 million platform into growing vehicle service equipment market. We also recently announced that the Wayne acquisition due to an extended regulatory review in the UK will now likely close in the first quarter. Our teams are actively exploring measures to satisfy the regulators’ concerns as quickly as possible, this matter relates only to the UK dispenser business which is very small in the context of the transaction.

Now looking forward. Within Energy, we are encouraged by the recent improvements in North American rig count and oil prices and believe both are constructive for continued near term improvements in our business. That said we anticipate our longer cycle oil and gas related businesses to remain sequentially flat.

In Engineered Systems, we anticipate activity and our industrial platform to remain soft due to a challenging macro industrial environment as well as from activity deferrals, as some customers push out order delivery in 2017. We expect our Printing and ID platform to have strong growth. Fluids overall growth will be less than we expected in our prior forecast, driven by continued weak longer cycle oil and gas markets as well as CapEx reductions like integrated energy customers. We expect the strong growth we’ve seen in our hygienic and pharma markets to continue.

Finally within Refrigeration and Food Equipment, we expect customer spending to slow as we close out the year. We also expect margin challenges to continue as we work to improve manufacturing at Hillphoenix. And with that, I’d like to turn it over to Brad.

Brad Cerepak

Thanks, Bob. Good morning, everyone. Let’s start on Slide 3 of the presentation deck. Today we reported third quarter revenue of $1.7 billion a decrease of 4%. This result included in organic revenue decline of 7% growth from acquisitions less dispositions was 3%, EPS was $0.83. Segment margin for the quarter was 14.1% below last year largely driven by lower revenue and the impact of acquisitions and production inefficiencies.

Bookings decreased slightly from the prior year to $1.7 billion. Within this result, acquisition growth of 6% was more than offset by the combined impact of reduced oil and gas markets dispositions and FX. Organic bookings in Engineered Systems grew 5%, Refrigeration and Food Equipment grew 6%, while Energy was down 22% and Fluids decreased 9%. Overall book-to-bill finished at 0.99.

Our backlog increased 4% to $1.1 billion or 1% organically. Fresh cash flow was $189 million for the quarter or 11% of revenue. We remain on track to generate free cash flow roughly 11% of revenue for the full year. Now let’s turn to Slide 4.

Engineered Systems organic revenue increased 1% reflecting solid growth in printing identification partially offset by soft industrial markets. Refrigeration and Food Equipments declined 2% driven by tough comps and can-shaping equipment and softer customer spending in retail refrigeration. Fluids organic decline of 9% was largely driven by upstream and midstream oil and gas exposure tough comps and lower than expected growth in retail fueling. Energy organic revenue was down 24%. As seen on the chart acquisition growth in the quarter was most prevalent at fluids with 27%.

Now on Slide 5. Energy revenue of $273 million decreased 25%, on a sequential basis revenue increased 5% driven by our upstream drilling and artificial lift businesses. Earnings of $13 million included restructuring cost of $5 million. Adjusting for these costs earnings were $18 million and margin was 6.8% in line with our expectations and sequentially improved.

Current quarter activity, order activity remains positive and we believe we’re on track to exit the year with margin near 10%. Bookings were $271 million, a 10% sequential improvement. Book-to-bill finished at 0.99.

Now on Slide 6. Engineered Systems revenue of $571 million was up 1% organically. Earnings of $97 million decreased 5% principally reflecting the impact of a disposition and also impacted by business mix. Our Printing and Identification platform revenue of $253 million increased to 11%. Organic revenue was up 5% reflecting solid global marketing and coding and strong digital printing activity. Acquisitions added 7% growth.

In the Industrial Platform revenue was $317 million which included in organic decline of 2%. The organic revenue decline was fairly broad based and also reflected activity deferrals into the first quarter at environmental solutions. Margin was 17% and 80 basis point decline. Bookings of $580 million were up 3% which included organic growth of 5% in both platforms. Book-to-bill for Printing and Identification was 0.98, industrial book-to-bill was 1.04, overall book-to-bill was 1.02.

Now on Slide 7. Within Fluids revenue increased 17% to $413 million while earnings decreased 12% to $66 million. Revenue performance reflects 27% growth from acquisitions partially offset by a 9% decline in organic revenue. The organic result was driven by declines in our longer cycle upstream and midstream oil and gas businesses and tough comps reflecting $18 million in project shipments last year that did not repeat.

In addition spending from certain integrated energy customers particularly in retail fueling was lower than anticipated. This decline was partially offset by very strong results in our hygienic and pharma markets. Margin declined 530 basis points reflecting lower organic volume and the impact of acquisitions and deal cost.

Bookings were $414 million, an increase of 16%, this result primarily reflects the impact of acquisitions on an organic basis, bookings declined 9%. Book-to-bill was 1.

Now let’s turn to Slide 8. Refrigeration and Food Equipments revenue was $451 million included an organic revenue decline of 2%. Earnings of $64 million declined 16% from the prior year largely driven by production challenges at Hillphoenix, the impact of the disposition and product mix.

The organic revenue decline was largely driven by tough comps in our can-shaping business. Margin was 14.2%, a 140 basis points below last year. Within this result production inefficiencies at Hillphoenix were $6 million or about 130 basis points of the decline. Bookings of $429 million were flat year-over-year and included organic growth of 6%. Organic growth was largely driven by strong order activity in our can-shaping business which will be shipped in 2017. Book-to-bill was 0.95.

Let’s go to the overview Slide on Page 9. Let me cover some highlights. Corporate expense was $27 million and net interest expense was $33 million both largely in line with expectations. Our second quarter tax rate was 28% generally in line with expectations. CapEx was $43 million in the quarter.

Now moving to Slide 10 which shows our full year guidance. Our 2016 revenue guidance has been adjusted to reflect reduced forecast. We now expect total revenue to decrease 4% to 5%. Within this estimate organic revenue is expected to decline 7% to 8%. We continue to expect acquisitions will add approximately 7% growth partially offset by dispositions and FX. From a segment perspective, Energy’s organic decline is essentially unchanged from our prior guidance. We continue to expect further sequential revenue improvement into the fourth quarter.

Fluids and Engineered Systems full year organic revenue forecast had both been reduced two points. We now expect Fluids to decline 6% to 7% and Engineered Systems to be flat to 1% growth for the year. The Refrigeration and Food Equipment organic revenue has been lowered three points and now is negative one to flat.

With regard to margin, we now expect adjusted margin to be around 14.1% this excludes restructuring and deal and other cost.

Turning to 2016 bridge on Slide 11. Let’s start with 2015 adjusted EPS of $3.63. We expect the year-over-year impact of lower restructuring cost in 2016 to be about $0.05. Performance including changes in volume, productivity, pricing, restructuring, benefits will impact earnings $0.73 to $0.71. This has reduced $0.38 at the midpoint from our prior forecast. Increases in investment and compensation will impact earnings $0.11 to $0.09 reflecting a roughly $0.09 reduction from our prior forecast.

Acquisitions less dispositions is $0.05 lower than our last forecast. Reflecting the impact of our recent acquisitions and also softer retail fueling activity. In total, net acquisitions will be about $0.07 accretive.

Lastly the combined impact of interest corporate expense and the tax rate has been adjusted $0.01 from our prior forecast. In total we expect 2016 EPS to be $3 to $3.05 down about $0.38 to midpoint from our prior guidance. Approximately $0.06 of this reduction is attributable incremental fourth quarter deal and restructuring cost.

With that, I’ll turn the call back over to Bob for some final thoughts.

Bob Livingston

Thanks, Brad. As I look back over the last 18 months our results certainly haven’t been up to our expectations. That being said, I don’t want to lose sight of the many positive achievements our businesses have made over this time. In Energy, we effectively managed to recycle that saw a US rig count drop from 1,200 to 400 in six quarters.

Through this down cycle we streamlined our business while maintaining strong service levels. We are now very well position to service our customers as activity in North America upstream markets improve. In Engineered Systems, we have expanded our Printing and Identification platform which has historically been a strong performer. Our industrial platform has also performed very well over the last few years, though facing some tough comps this year. I’m excited about what we’ve done in this segment especially with our recent acquisitions.

Within Fluids, we have built a strong plastics and polymer. We are also in the process of building a world class retail fueling business. Our Fluids performance will improve through ongoing integrations and the addition of Wayne.

Lastly, in Refrigeration and Food Equipment, we’ve done a good job diversifying our customer base and growing share with several customers. While this new business has certainly put stress on manufacturing, we have executed well on customer service, quality and delivery times.

As previously noted, we have added scale in several markets where we see strong growth potential. In addition, we’ve further focused our business by divesting non-core assets. In all, our recent acquisitions combined with Wayne will add over $700 million in revenue next year. These deals together with a continuing recovery in upstream oil and gas markets and our commitment to improve margins give me confidence we are on the right path.

With that, I’d like to thank our entire Dover team for staying focused on our customers. Now Paul let’s take some questions.

Paul Goldberg

Thanks, Bob. As a reminder, we have lots of people in queue so I’d like to remind you - please you get one question with one follow-up and with that, Paula if we can have the first question.

Question-and-Answer Session

Operator

Your first question comes from Scott Davis of Barclays

Scott Davis

I’m trying to get sense, I struggle sometimes the model you guys - because when things come back it’s going to be probably pretty darn good. But when Energy comes back is the incremental margin and I’m talking more on upstream stuff. Is the incremental margin higher in 2017 than it was in kind of the good years as to say three years ago or is it lower? And I guess the reason why I’m asking this question is that, does the restructuring mean that you get a higher incremental margin or does that get offset by weaker price?

Bob Livingston

Well I would start first by saying I don’t - with everything we’re looking at with respect to our planning for 2017, we are not assuming that we are going to have price increases.

Scott Davis

Yes, I’m just talking about - did the decreases hurt you, I mean I would assume prices are going to be down in their backlog, right?

Bob Livingston

Yes, we don’t see further price degradation in 2017, Scott but we surely are not planning on price increases. But to the heart of your question with respect to the incremental margins in a recovery phase. I would say in the early months of the recovery let’s say at least the first six months, we are going to be quite diligent and not adding any cost unless they’re absolutely required to service the customer. So I think as we see, a 10%, 15%, maybe even up to a 20% increase in volume. We will not be adding the cost base back like we would have had in 2014. I think as you get behind the flex point of the manufacturing capability and you’ll see us adding some cost. But I think in the first few months of the recovery you’ll see incremental margins that will be quite attractive.

Scott Davis

Yes, okay that’s helpful and then, I know there’s lots of questions so I want to ask quick follow-up on Hillphoenix. What does production inefficiencies really mean? I mean in my world it means volumes are light, you didn’t control cost, but does it mean something different, to you guys?

Bob Livingston

Well no, actually volumes aren’t light, Scott. In fact I was pretty pleased with the bookings at Hillphoenix in the third quarter and I will tell you that maybe I’m being a bit cautious here but the booking, the order rates, the booking rates here in October are coming at a bit stronger than we had anticipated for a normal fourth quarter order run rate.

Brad Cerepak

Seasonally strong.

Bob Livingston

Seasonally strong. So the production inefficiencies have nothing to do with the reduced volume. It’s actually the complexity that we’ve added into the organization with many new customers and smaller product box and I would tell you sort of the fixes and changes that we’re making sort of fall into two key areas. One is little bit better integrity around our comp [ph] bond releases and a little bit better integrity around holding our production schedules once they’re released and that’s been a challenge for the team over the last three or four months.

The guide we have in the fourth quarter. I would like to believe I’m being cautious with this guide with not only the segment but specifically with Hillphoenix, that our guide for the fourth quarter does not assume any further improvements in our production variances beyond what we were running at in September. That said, we continue to work every week, every day to improve the manufacturing flow at Hillphoenix. You want to add anything to that, Brad?

Brad Cerepak

No, I would just say that’s a view versus our expectations and year-over-year the team continues to make progress. I mean I would say the added piece I would say is that the production through the facility year-over-year is not abnormal. And what I mean by that is that, the production cost seem to be fairly in line it’s where our expectations are much higher for further productivity.

Bob Livingston

I’ll give you a number. We measure this with respect to their production variances. The cost for us in the third quarter for these production variances at Hillphoenix was $6 million.

Scott Davis

Okay.

Bob Livingston

It’s a significant number.

Scott Davis

Great answer. Okay, thank you guys. I’ll pass it on.

Operator

Your next question comes from Steve Winoker, Bernstein.

Steve Winoker

I want to stick on Hillphoenix for a while. I have been known that business for more than 15 years and they were one of the few folks who were able to make money in this industry, when so many others were bleeding and a lot of that was the magic of the whole business model and you’re talking, I know as you’re making everything more complex or sorry as the customer mix is becoming more complex that is one of the problems that the old guys always had before you took over one of them and others struggle. So is this more than just a small manufacturing fix but rather a whole design for manufacturability and broader fix. I mean I’m just a little more concerned of what I’m hearing.

Bob Livingston

Longer term, we’re looking at I would label it as product design opportunities but that’s not impacting our product flow today. It is just unbelievable how much the, I call it the mix complexity has changed at Hillphoenix over the last six and nine months and as we hit the seasonal ramp period here in late second quarter and in the third quarter that complexity really did hammer us, Steve.

Steve Winoker

Okay, all right well we can maybe dive in later. But and then just on that point, you mentioned $6 million production.

Bob Livingston

And by the way when you Hillphoenix has always made money, look we’re still making money, which is not to our expectations. I’m not just saying my expectations we’re not operating at Hillphoenix’s expectations.

Steve Winoker

Okay, fair enough and just so I’m clear that production variance of $6 million. Is there any way to sort of give us the thought for how much of, I don’t know the year-on-year negative impact came out of these inefficiencies?

Bob Livingston

Well let’s see, I think Brad you shared a comment that margins were down 130 or 140 basis points. Actually I think if you do the math, maybe 120 of the 140 decrease was the $6 million of production variances. Am I close on that number?

Brad Cerepak

Yes.

Bob Livingston

In the third quarter and we’re talking third quarter year-over-year.

Brad Cerepak

Yes.

Steve Winoker

Okay, I think I used my follow-up question. So I’ll pass it on.

Operator

Your next question comes from Joe Ritchie of Goldman Sachs.

Joe Ritchie

So just not to [indiscernible] this too much but just one last question on Refrigeration and Food Equipment. When do you think this gets rectified and does your new production design allow you to then potentially stem share loss and potentially even gain share. So how are you guys thinking about that?

Bob Livingston

Well, your comment about share loss I would say that one is behind us because you’re referring to the loss of the business at Walmart.

Joe Ritchie

Yes, I just look at your trends. I’m sorry.

Bob Livingston

Yes, go ahead.

Joe Ritchie

No, I was just going to say I was just looking at your trends in the most recent quarters and I think they’ve been flat to down depending on which sub-segment we look at and it looks like you’re continuing to lose share in certain pieces of your business and so I’m just curious whether this allows you to potentially stem some of that?

Bob Livingston

Okay and this is a question specific to Hillphoenix.

Joe Ritchie

Correct.

Bob Livingston

Okay, I will tell you that aside from the Walmart global bid that we lost the chunk of business and we have not lost share with other customers, we’ve been gaining share.

Joe Ritchie

Okay.

Brad Cerepak

Keep in mind we do have a disposition in there that you have to take out when you do your comparisons.

Joe Ritchie

Fair enough.

Bob Livingston

[Indiscernible] business was divested in the fourth quarter of last year and if I remember correctly, I think.

Brad Cerepak

[Indiscernible].

Bob Livingston

We can say $85 million to $90 million in sales.

Joe Ritchie

Got it, but I guess in terms of maybe the initial question was, when does it get rectified so maybe some thoughts there?

Bob Livingston

Again, you’re asking a question about the Walmart business.

Joe Ritchie

I’m talking more about the production inefficiencies that contributed to the margin that you.

Bob Livingston

I think you’ll see us having the two key areas that I’ve mentioned here around the integrity of the comp [ph] bond releases and the integrity of the holding the production schedule. I think you’ll see us have that completed here in the three or four months.

Joe Ritchie

Got it and then maybe coming off of refrigeration and food equipment for a second and talking about fluids. If I take a look at the organic orders over the last few quarters they’ve continued to deteriorate. I guess at what stage do you think that this reverses clearly Wayne closes will help you from a growth perspective, but I’m just curious how you’re feeling about 2017 from organic standpoint, where we stand this year?

Bob Livingston

Look the biggest year-over-year decline within fluids that we’ve experienced has been in the applications and the businesses that are either in the upstream or the midstream oil and gas markets. And when I shared that comment I’m including what we would label internally as our transportation activity around railcar, tank cars as well as terminal loading arms. And the bulk of that decline has been in North America, that decline has been fairly significant. I think year-over-year if I rolled all of that together it’s probably down about 23%, 25% and it’s about this oil and gas exposure is about 22%, 23% of the segment when I include transportation.

We’re not expecting any recovery in the fourth quarter that I can tell you. I think the outlook for 2017 in this part of the business is going to be dependent upon further recoveries in the upstream oil and gas market and I think we’ll have a better feel for that as we move through the fourth quarter.

Joe Ritchie

Got you. I’ll get back in queue, thanks guys.

Bob Livingston

We will provide our outlook and some detail in this part of the business at our investor dinner in December.

Joe Ritchie

Okay, good enough. Thank you.

Operator

Your next question comes from Andrew Kaplowitz of Citigroup.

Andrew Kaplowitz

Maybe just a little more color on Fluids in terms of the Fluids transfer business. You know I think Joe asked about, it did weaken this quarter versus last quarter a little bit more that particular business. You guys have mentioned big integrated not spending in the past you mentioned Canadian OPW’s weakness and then of course Tokheim you were setting some improvement in the second half of the year. It doesn’t seem like it’s materialized as much as you thought, so maybe you can talk about the pieces of fluid transfer.

Bob Livingston

Okay, so across the board within fluid transfer. No actually I don’t want to say across the board because in the couple of our businesses that deal with hygienic and pharma markets, their order activity and business activity is up actually quite strong. I think its high single digits 8% or 9%. The bulk of the headwinds that we have experienced this year and again I’m repeating myself from Joe’s question have been in the upstream and midstream oil related markets. The North American retailing fueling market and this is not Tokheim, this is now OPW we’ve had growth in North America but it’s been less than we expected and I think third quarter growth year-over-year for North America retail fueling this is the OPW legacy business. I think was 6%.

That said, North Canada was significantly lower than we expected and it ended up being a decline in spending the customers or from customers in Canada. Tokheim, I think we’re probably going to end the year. The second half will come in fairly close to our expectations of Tokheim that we had in July but we do see some changes. Middle East is softer than we were looking at three months ago. China has degraded a bit but not much. I’m talking a $1 million or $2 million but it hasn’t changed that much since the July call and absent my comment or excluding my comment on the Middle East. European activity has had growth with Tokheim during the second half. Do you want to add anything?

Brad Cerepak

Yes, I would interject on there. I think from our last views on Tokheim we probably see a softer sales number now for the year of about $10 million to $15 million and it’s impacting us about $0.02 in the acquisition line but as Bob said it’s really more the emerging markets part of Tokheim.

Andrew Kaplowitz

Okay that’s helpful but maybe just on ‘17. I’m not asking for guidance but if you look at sort of the non-organic pieces just sort of puts and takes. You’ve got lower restructuring spends in 2017, incremental restructuring savings, your auto aftermarket acquisition and Wayne potentially coming in, Tokheim more accretive given the deal cost go down there’s just a lot of moving pieces. Are there any sort of advice you could give us on how to model the pieces and then it looks like competition indefinitely came down significantly this year that headwind next year.

Brad Cerepak

Well there’s - we’ll have a lot to say about.

Bob Livingston

I’m glad to get the question because I told Brad we’re not give guidance today.

Brad Cerepak

We have a lot to say in December but you’re right. I mean I would echo some of things you’re saying. And we do see a lower restructuring spend next year. We expect 40 to 44 this year, we always have restructuring so not giving guidance today but it’s always been put aside tough markets 15 to 20.

Bob Livingston

15 to 20, yes.

Brad Cerepak

So that will be lower, we have carryover benefits on restructuring which will take us into 2017 my rough number would say that’s about $30 million. I think we’ve said that before, we still see that as an opportunity. You’re right the acquisitions will be better for us next year. We do have Wayne slipping out now best estimate its first quarter, we were hopeful to get that done this year and get some of the final expenses and not only the final expenses but I would say the early amortization step ups through the P&L and the first part of the fourth quarter here, that will now hit us in 2017. And I think there will be a lot more to talk about in terms of the integration and the synergy benefits there as we get into December, but too early really to pin point a number, we have to first close the deal.

Andrew Kaplowitz

Okay, guys. Thank you.

Operator

Your next question comes from Andrew Obin, Bank of America Merrill Lynch.

Andrew Obin

Just a question on fourth quarter. Seasonally Q4 is usually below Q3 and I appreciate there was some idiosyncratic things in Q3 but we’re modelling Q4 in line with Q3 and I was just wondering if you could give us big buckets as to what the sequential positives are and specifically also want to understand if you sort of highlighted lower compensation and investments versus your prior guidance, how much of that is in the fourth quarter versus the third quarter?

Brad Cerepak

Well I’ll take the last one, first and then Bob can talk sequentially, but probably the segment would be best. You know that compensation, when you think about that investment and comp line, I would say half of it is comp, half of it is just holding back on some adds that we would have normally have done this time of year going into next year. And I would say it’s 50-50 split between the third and the fourth, we trueup [ph] comp accruals every quarter and so year-to-date updated that during the third quarter and you’ll see a little bit of that coming through in the fourth on that comp line. As far as.

Bob Livingston

Okay with respect to sequential trends third to fourth. We expect Energy to be up a bit on the top line more than that improvement on the bottom line. We expect Fluids to continue to have growth sequentially into the fourth quarter and.

Brad Cerepak

4%.

Bob Livingston

Yes and I would tell you that the bulk of not all of it, but a significant chunk of it maybe 60% of the growth we’re seeing in fluids from the third to the fourth is retail fueling.

Brad Cerepak

We have growth in MOG [ph] pump too.

Bob Livingston

And MOG [ph] pump. DES will be up, but I would say that’s probably all related to the acquisition, I think organically, DES is probably flat. We’ll see continued growth in our product ID platform and maybe very modest decline organically in our industrial platform and refrigeration segment is down but it always is, it’s seasonally down.

Andrew Obin

And just a follow-up question. You made comments on broad sort of industrial weakness and I appreciate you’ve given some color. At the same time if you look at the Product ID, those short cycle more consumer driven businesses seem to be doing well, just from a 40,000 foot view what’s happening in the economy because it seems a lot of other industrials have had weak second half of September.

Bob Livingston

Yes, you pulled out a good example here with our Product ID business especially [indiscernible] and number one I think we commented on this a couple times earlier this year with respect to both China, what we’ve seen in China over the last couple of years and in Europe and I think we’re seeing it here in the states, here over the last six months or so a clear difference in customer spending of what I call OpEx items versus CapEx items and I label our market and coating business as an OpEx item.

It is interesting when you look at our order trends during the third quarter what did give me some pause as we close the quarter, was September order rates were actually less than August. That’s a bit unusual for us. We have really peeled that to try to understand what’s going on and where we’re seeing it, but and again I’m going to repeat it September order rates were less than August, that’s giving us a little bit. I call it pause for I guess maybe I hope what proves to be a bit of a cautious approach with respect to our fourth quarter guidance.

If I were to share with you some early reads here in October. October order trends are actually a little bit better than we expected.

Andrew Obin

Thank you very much.

Bob Livingston

And that’s across the board. I would tell you something else we started to see here in the second quarter or in the third quarter. Not only with orders that were in our backlog but with new orders, we can pretty easily circle about $50 million of revenue that was expected to ship either in the third quarter or the fourth quarter where customers have pushed it out to 2017. It’s not anything significant with any individual business but collectively the number surprise me.

Andrew Obin

Thank you very much.

Operator

Your next question comes from Steve Tusa from J.P. Morgan

Steve Tusa

So just wanted to make sure I got the fluid. You said revenue is up 4% sequentially in 4Q and so I guess is ultimately and I’m not sure what base you were talking about with Tokheim, but what’s the actual revenue number you’re thinking about with Tokheim, this year?

Bob Livingston

I don’t have it with me, Brad.

Steve Tusa

Well you said, you tweaked it by $10 million to $15 million, so it’s kind of specific comment, that’s all.

Bob Livingston

Yes, but you asked me for total number and I don’t have that here with me right now.

Brad Cerepak

Yes, well it’s going to be Steve around $230 million to $240 million. It’s down significantly due to the emerging markets mainly China as we talked about before. Sequentially Tokheim had second quarter into third quarter 13% growth rate, this is the seasonality of that business and we see that continuing into the fourth quarter with about 10% sequentially on Tokheim specifically 4%.

Bob Livingston

For the segment.

Brad Cerepak

For the segment, that’s on the strength of some tenders we won, we’ll see them ship in the fourth quarter into 2017 by the way. So 2017 in Tokheim I think will have better comps, a better opportunity for us.

Steve Tusa

Okay and then just a quick follow-up by, that’s great color by the way on the fourth quarter. On refrigeration and food, your margins have kind of they treaded [ph] down this quarter, they were down even adding back their production inefficiencies, I mean will you be able to grow margins at this business in the fourth quarter and also, has Kroger gotten into you guys as far as giving you any indication of what they’re going to spend in 2017 or does that come kind of later in the year?

Bob Livingston

We have an indication, but we don’t get enough, I call it specifics until a little bit later in the year. And help me with the number. We did see within the Hillphoenix backlog, I think about a $1 million worth of orders and maybe it may have been bit less but there was something, it wasn’t a bit number but we did see it.

Steve Tusa

How big is Kroger now for you guys, are they almost as big as Walmart?

Bob Livingston

No.

Steve Tusa

Okay.

Bob Livingston

A third.

Steve Tusa

And then just quickly 4Q margins for refrigeration directionally because they were down but they were up in the first quarter, so just curious is to how you kind of play that out as you run through these production inefficiencies.

Brad Cerepak

Fourth quarter margins are little bit better.

Steve Tusa

Year-over-year?

Brad Cerepak

Yes.

Steve Tusa

Okay, thanks.

Operator

Your next question comes from Jeffrey Sprague of Vertical Research.

Jeffrey Sprague

A couple things, just on oil back to energy specifically. Just a couple pieces of color I’m looking for. First you commented about long cycle weakness. I’m wondering if that’s a comment away from the drilling and production numbers in the bearings and compression, can you just elaborate on that first.

Bob Livingston

Well let me, give you a perhaps a better definition of what I refer to when I say our early cycle applications and it really is drilling and artificial lift, Jeff. When I label our early cycle applications, our longer cycle applications yes is bearings and compression as well as our wench business.

Jeffrey Sprague

So are you seeing further downward pressure specifically in the gas driven market?

Bob Livingston

This is not deteriorated since the second quarter. And our bearings and compression business and third and fourth quarter, we actually see a very, very modest. In fact it’s so modest, you have to call it flat. Flat performance from the third to the fourth and our bearings and compression business and slightly improved margins.

Jeffrey Sprague

And then back to the early cycle stuff on the drilling and production side, what are you seeing now on production, completion specifically, is there an uptick in completion activity with kind of wells here with, kind of five handle any real inflection in those two there?

Bob Livingston

Yes, there was an increase in activity in the third quarter on the completion of wells. Let me give you a data point here at comp. so if I look at rig count, second quarter to third quarter and my number is going to be the poorly average from second quarter to third quarter. The rig count was up I think 14% and in our early cycle applications around drilling and artificial lift combined, the growth in that part of the business was almost identical to the increase in the rig count. It correlated very, very well, Jeff.

We would expect that correlation to hold true for October and November as well. We’re being a bit cautious here in our outlook for energy with respect to the month of December. We have some concerns that we are going to see something similar to last year, when customers went really quite for the last two weeks of December and in fact many of our customers actually did not take product delivery at all through the final two weeks of the year.

I don’t know if we’re going to see that same phenomenon again this year, but we do expect a little bit of slowing in activity in December and it’s not connected to rig count per se, it’s just connected to customer spending and I call it balance sheet management.

Jeffrey Sprague

Yes, I would have guessed and correct me if I’m wrong but what you said there about you’re up 14 tracking to rig count up 14 implies I guess no net draw down on ducts [ph] in the quarter and I guess I would have thought that in my cap.

Bob Livingston

Okay, there was a net draw down, I don’t have a number but I think it was significant relative to what we’ve seen over the last three or four quarters. I think, the net draw - and we haven’t seen the final data on that. But I think the net draw down on ducts [ph] in the third quarter could be approaching a 1,000 wells. You have to appreciate that 20%, 22% better than 20% I think it maybe 22% or 23% of our artificial lift business is outside of North America and that especially in the Middle East and Latin America in the third quarter, we actually saw, I think a small single-digit decline year-over-year in our non-North American business and our US artificial lift business the, it was a little bit better than the rig count increase.

Jeffrey Sprague

And just finally I’m sorry, if I could sneak one in, you gave us in the bridge kind of the fuel cost impact in Fluids, but can you give us the sense of what the overall mix effects of all the M&A is in Fluids, if you can parse that down to kind of almost the same store sales basis on the core underlying Fluids.

Brad Cerepak

You want core margins, Jeff?

Bob Livingston

Do you want core margins?

Jeffrey Sprague

Yes.

Bob Livingston

So let’s see, we had a.

Brad Cerepak

Core margins, ex-acquisitions.

Bob Livingston

Ex- acquisitions and deal cost 20%.

Jeffrey Sprague

Thank you very much.

Operator

Your next question comes from Nigel Coe of Morgan Stanley.

Nigel Coe

Yes, we caught a lot of grounds so couple of clean ups from me. So just going back to Andrew’s question about the sort of 30,000 foot macro view, what you hearing from customers? I mean, are we seeing budgets to third or budget cuts or is there some softening in the solution channels, where we are seeing some inventory headwinds, I mean any color there will be very helpful.

Bob Livingston

It depends, I think it somewhat depended upon the sector. I think what we continue to see in our longer cycle, oil and gas applications is continuing budget cuts and I’m not so sure that the customers are actually cutting their CapEx budgets but are being reallocated. We are convinced that’s happening a little bit here in North America with respect to the EMV rollout, even though we in our OPW legacy business have shown organic growth year-to-date and we’ll show it for the year. It is less than expected and we are rather certain that part of that reduction is being diverted to the EMV rollout.

So they’re not necessarily cutting their budgets but reallocating where some of the CapEx spending is going. In the industrial that one’s a tougher one to call, Nigel. The orders do seem to be closing a bit longer, the cycle is a bit longer and as I mentioned earlier the push outs that we’ve seen over the last couple of months, I made the comment to Brad just recently, we’d go back several years before we would find a quarter really saw that level of push out activity.

Nigel Coe

Yes, that’s the [indiscernible] of my question. I’m just trying to figure out what caused that to happen this quarter as oppose to maybe first half of the year. Yes, okay.

Bob Livingston

I’m not sure, I can answer that question. I can tell you that it’s rather evident right now.

Nigel Coe

Okay, great and then just on the fluids margins. You know in previous calls you call out the impact of acquisitions it’s obviously lot of noise in that number. So I’m just wondering if you can give us.

Bob Livingston

Let me maybe correct that, when we say ex-acquisition and deal cost, maybe that number is also ex-restructuring. It’s all out, its ex-restructuring acquisitions and deal cost.

Brad Cerepak

So it really is the core margin of the continuing business of fluids.

Nigel Coe

And sorry, what was that core margin again, Brad?

Brad Cerepak

20%.

Nigel Coe

20%, okay that’s helpful.

Brad Cerepak

In the quarter, yes.

Nigel Coe

Right, and then just a quick one on the Energy, you know the comments in your prepared remarks seems to point us to minus 26% or there are about on your full year guide, but then you commented about the December caution. So the reason for the range on energy, the wide range of energy would be because of the December caution perhaps.

Bob Livingston

Yes.

Nigel Coe

Great, thanks guys.

Operator

Your next question comes from Deane Dray of RBC.

Deane Dray

One of the changes that people are talking about in retail refrigeration is the recent announcement that Amazon is planning to move into grocery stores and so what might the prospects be for Hillphoenix this new customer, what the timing might be and are you in discussions with me?

Bob Livingston

Amazon is a customer of Hillphoenix, we are working with them pretty closely on their distribution centers and I know that guys are having discussions on their, I call them their neighbourhood rollout program.

Deane Dray

Any chance you could size for us, what an opportunity that might be and the time out?

Bob Livingston

They can’t even size it for us. Deane. From a timing perspective, I doubt you would see anything measurable in our business before the second half of next year and that’s a guess rate now based upon what little bit we know that’s been shared with us.

Deane Dray

Got it and then on potential divestitures, are you still contemplating others like you did with Tipper Tie, what might the prospects be for those in timing there?

Bob Livingston

So I’ll turn this over to the guy, who runs M&A.

Brad Cerepak

Thanks, Bob. I don’t want to say too much about timing on other things but as you know we’ve always communicated that there are parts of the portfolio that given the right opportunity perhaps, we would love to do something once, now that’s the best I could tell you at this point.

Deane Dray

That’s pretty vague, Brad.

Brad Cerepak

I know. I’m not announcing divestitures today. I’m not - announcing any divestitures today.

Deane Dray

Got it, thank you.

Operator

Your final question comes from Julian Mitchell of Credit Suisse

Julian Mitchell

Thanks for saving the best to last.

Bob Livingston

We did, Julian.

Julian Mitchell

Welcome. I’m glad to hear it. Just on the refrigeration again, really on the top line and I guess there doesn’t seem to have been much linkage so far between the year-on-year change in organic orders and the year-on-year change in organic sales, orders have been trending pretty good I think organically up about 5%.

Bob Livingston

Orders have been strong, yes. Orders have been strong.

Julian Mitchell

So when should that gap start to close because it sounds like Q4 again will be tough for the revenue line, is it all coming in the first half of next year although the visibility is low on that?

Bob Livingston

I would say, you’ll see that gap closed, maybe not all in the first quarter but it will close in the first four months.

Julian Mitchell

Understood and then just within the energy business the pricing pressure I guess has been stable at around 1.8% in the last couple of quarters.

Bob Livingston

[Indiscernible].

Julian Mitchell

That’s the good rate for next year, okay. And that should be the good rate for next year, is that what you meant by no sort of further degradation earlier on.

Bob Livingston

Should not be any worse than that.

Julian Mitchell

Understood. Thank you very much.

Operator

Thank you. That concludes our question-and-answer period. I would now like to turn the call back over to Mr. Goldberg for closing remarks.

Paul Goldberg

Thank you, Paula. This concludes our conference call. With that we want to thank you once again for your continued interest in Dover and we will look forward to speaking with you again next quarter and just a reminder, our Investor Day will be in early December and we will send out invitations for that. Have a good day.

Operator

Thank you that concludes today’s third quarter 2016 Dover Earnings Conference Call. You may now disconnect your lines at this time and have a wonderful day.

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